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A Giant Puffing Sound

Simon Lester

Ross Perot warned of a “giant sucking sound” when the original
NAFTA was signed, but the new NAFTA being negotiated right now may
coincide with a giant puffing sound. Marijuana legalization efforts
in both Canada and the United States (and Mexico for medical
marijuana) will, as with most goods and services these days, become
intertwined with complex trade agreement rules on public health,
investment, intellectual property and state-owned enterprises.

So will the North American Free Trade Agreement bring us free
trade in cannabis? Or will the negotiators kill this buzz by
carefully drafting language that excludes marijuana products from
the trading system?

A few countries recently began legalizing marijuana for
production and sale in their domestic market. But what about
international trade? Why not allow consumers in foreign markets
where marijuana is also legal to purchase high quality marijuana
products from Colorado merchants?

We will get to that place someday, as countries’ experiences
with these products makes them more comfortable with accepting
marijuana products from abroad. But NAFTA is unlikely to achieve
anything here, as the issue of legalization is still controversial
and sensitive. For now, the Canada/United States and Mexico/United
States borders will not see marijuana products flowing freely and
legally. Instead, international trade in these products is likely
to remain prohibited, with border barriers on these products
probably justified under the standard trade agreement exceptions
for protection of “public morals” or “public health.”

However, modern trade agreements cover more than simple border
barriers, and more than two decades of experience with trade
agreements after NAFTA was signed have shown us how domestic policy
issues can lead to trade controversy and litigation. There are a
number of areas in which NAFTA rules may have an impact on the
marijuana marketplace as legalization progresses.

First, there is already some cross-border investment in
marijuana, with U.S. companies investing in Canada (the company that owns
Corona will pay $190 million for a stake in Canopy Growth
Corporation, which sells medical marijuana in Canada and plans to
sell recreational pot when it is legalized), and Canadians
investing in the United States. These investments will be subject
to NAFTA’s protections for foreign investment. Foreign investors
who believe that domestic regulations on marijuana industry
constitute “indirect expropriation” or do not accord “fair and
equitable treatment” — two of the key obligations in the
investment chapter — can sue the host government for damages
in an international tribunal. Domestic regulation in the marijuana
sector will be extensive and seems to be carried out in a clumsy
manner at times. As a result, there may be opportunities for
international lawsuits against these regulations.

Second, trade agreements have detailed protections for
intellectual property, and marijuana producers are creating some
valuable trademarks and patents. With regard to trademarks,
controversial disputes over cigarette packaging have been going on
in trade and investment tribunals for years, focusing on so-called
“plain packaging” of cigarettes as well as health warnings on these
products. Tobacco company Philip Morris has made headlines by
bringing investment treaty disputes against the governments of
Australia and Uruguay, and several governments challenged
Australia’s plain packaging regulations at the World Trade
Organization.

For similar reasons, the inevitable regulation of marijuana
product branding could bump up against NAFTA’s trademark rules. And
patents are proliferating in the area of cannabis for medical use.
Different approaches by Canada and the United States to patent
protection could also lead to trade conflict, as was the case
already in a NAFTA complaint by pharmaceutical company Eli
Lilly.

Third, some Canadian provinces plan on distributing marijuana
through the state-controlled entities that currently sell alcohol.
For example, the Liquor Control Board of Ontario, a crown
corporation that is accountable to the Ontario Ministry of Finance,
will oversee the retailing of cannabis across the province through
stand-alone stores and an online ordering service. But in recent
trade agreements, the United States has pushed for special rules on
“state-owned enterprises and designated monopolies” where the
activities of those entities “affect trade or investment between
Parties within the free trade area.” Among other things, these
entities must act in a manner that is based on “commercial
considerations.” Similar rules are likely to be part of the NAFTA,
and this could have an impact on Canada’s plans for the sales of
marijuana products.

These are just a few examples. NAFTA rules on product standards,
food safety standards and banking regulations may also give rise to
concerns about the trade impact of marijuana regulation.

International trade in marijuana products is good for the same
reasons that legalization of marijuana is good: There are
considerable benefits from some of these products, prohibition does
not work, and any harms can be managed through appropriate
regulation. But it might be too early to expect significant
liberalization of marijuana through trade agreements. Getting
domestic markets up and running has been controversial enough, and
additional negative attention for the industry due to international
trade could make things worse.

With all this in mind, the NAFTA negotiators should think
carefully about how the various rules and exceptions they are
drafting might apply to marijuana products. Free trade in marijuana
is probably coming someday, but for now the negotiators’ focus
should be on crafting rules that keep controversy and litigation to
a minimum.

Simon Lester
is a policy analyst at the Cato Institute’s Herbert A. Stiefel
Center for Trade Policy Studies.